Top-Rated High-Yield Stocks

It's certainly not difficult for investors to find high-yielding stocks these days, particularly among beaten-down financials. Freddie Mac (NYSE: FRE  ) , for instance, features an incredible yield of more than 30%. 

As the saying goes, however, some things are too good to be true, and unfortunately that's the case with Freddie Mac's yield. After all, the yield looks at trailing dividends -- you know, before Freddie started having big problems. In fact, the company recently said it plans to slash its dividend to improve its capital base.

Toil and trouble
As a general rule of thumb, any dividend yield more than three times the market average should be approached with caution and merits extra research. At present, the S&P 500 average yield is 2.2%, so this would mean yields above 6.6%.

See, what matters when it comes to high-yield investing is the sustainability and potential growth of a company's dividend. If dividends are important to you, you don't want to end up with a stock like Washington Mutual (NYSE: WM  ) , which has all but eliminated its dividend. Among other things, it's important to look for stocks with sufficient dividend coverage, modest debt, and a history of increasing dividend payments.

Let's find some
To narrow our search to a few good names, we'll enlist the help of our Motley Fool CAPS screener and search for larger stocks with:

  • Yields greater than 3.5%.
  • Below-market price-to-earnings ratios.
  • Four- and five-star CAPS ratings.

The last bullet point is particularly important, because we've found that four- and five-star stocks have outperformed the market by a wide margin from November 2006 to July 2008.

Without further ado, here are a group of five top-rated high-yielding stocks, according to our 115,000-member CAPS community:

Company

CAPS Rating

Yield

Research

Dow Chemical (NYSE: DOW  )

*****

4.9%

DOW

Consolidated Edison (NYSE: ED  )

****

5.7%

ED

Toronto-Dominion Bank (NYSE: TD  )

****

4.2%

TD

Dominion Resources (NYSE: D  )

****

3.7%

D

Unilever (NYSE: UL  )

****

3.8%

UL

Source: Motley Fool CAPS as of Aug. 21, 2008.

Want to learn about other highly rated stocks? Sign up for Motley Fool CAPS today. Don't worry, it's 100% free, so enjoy your stay on us! Click here to start.

Unilever and Dow Chemical are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Todd Wenning follows a portfolio of high-yield stocks on CAPS, which you can see by clicking here. He does not own shares of any company mentioned. The Fool's disclosure policy rocks on with its bad self.


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